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PAC report says IR35 rules too complex

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The complexity of the IR35 rules could be deterring employers from using contractors and in some cases could be driving business overseas.

5th Mar 2024
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The Public Accounts Committee (PAC) has raised concerns that the complexity of the IR35 rules and HMRC’s tough approach to challenging mistakes is deterring employers from using contractors and warns that in some cases business is being driven overseas.

The IR35 legislation, or off-payroll rules, was designed to tackle tax avoidance by ensuring that workers deemed by HMRC to be “disguised employees” pay broadly the same amount of income tax and national insurance (NI) as regular employees. In 2021 the IR35 rules were reformed so that the burden of determining employment status shifted from the individual worker or contractor to the client.

The PAC report, published on 22 February 2024, concludes that “HMRC’s approach to serious abuse is not deterring criminal activity sufficiently, while at the same time its approach to tackling IR35 is deterring legitimate economic activity.”

Hiring contractors too risky

Determining whether a worker is a deemed employee “inside IR35”, or self-employed “outside IR35” is rarely straightforward as the rules can be tricky to decipher. The fear of litigation and penalties for getting it wrong are prompting businesses to err on the side of caution and take workers onto the payroll even where they should be treated as contractors. According to the PAC report, since the reforms 150,000–200,000 contractors have been moved onto the payroll as companies would rather avoid the hassle. This puts freelancers and self-employed contractors at an unfair disadvantage.

Commenting on the report Dave Chaplin, CEO of tax compliance firm IR35 Shield, who provided evidence to the hearing, said: “The PAC’s scrutiny over the implementation of the IR35 Reforms correctly identified that the new rules are deterring legitimate economic activity, which aligns with what we are seeing on the front line, particularly in the media sector. We are seeing broadcasters seeking to misclassify people as “deemed employees” based on risk, rather than the law, because the broadcaster fears HMRC will tell them they’ve got it wrong and issue them with a tax bill.”

Julie Falchevska, MD of Maslins, reports a similar experience from the coal face. She told AccountingWEB: “The shift of decision-making from ‘contractor’ to ‘fee payer’ is, in our opinion, an improvement. It did however lead to an initial overreaction by corporates, with virtually no outside IR35 roles being offered immediately after the rule changes.

“This has relaxed now, as businesses have taken a more pragmatic view. It does however leave them at risk. They can be trading for several years, paying many contractors, to later have HMRC challenge the treatment. This could then lead to years of litigation, and potentially huge liabilities. Having that uncertainty hanging over businesses is not a positive thing for anybody, and is surely damaging the UK economy.”

It’s time to look at a statutory test

HMRC told the committee that it provides tools and guidance to help employers apply the correct tax treatment to their workers, but accepted that the tools and guidance may need updating in light of recent court judgments.

Falchevska agrees: “The main problem with IR35 rules is their subjectivity and vagueness. Normally the advice for things like this is to speak to an expert, but you could speak to two respected experts, with one believing a role was outside, the other confident it was inside. Multiple cases are going to the courts, and being appealed, with the results demonstrating this problem. We appreciate CEST [HMRC’s Check Employment Status for Tax tool] was an attempt to solve this, but it’s been much criticised, and we gather HMRC won’t even be bound by its results. In practice, it’s therefore useless.”

The CEST tool is continuously tested against settled cases with 12 new cases added in February 2024. Rebecca Seeley-Harris, employment status and IR35 expert at Re Legal Consulting Ltd is concerned that this reliance on case law to determine employment status is exacerbating HMRC’s heavy-handed approach to IR35 cases. Recent high-profile cases including Kaye Adams (Atholl House), Phil Thompson and Adrian Chiles have shone a spotlight on the lengthy, expensive and often traumatic battles faced by taxpayers whose employment status HMRC decides to challenge.

Speaking to AccountingWEB Seeley-Harris said: “The PAC committee report was a bit scant on detail in my opinion but, fortunately the oral evidence is available. What I found interesting is HMRC’s stance on using a barrister to represent them at a first-tier tribunal. Ordinarily, the first tier tribunal (FTT) should be a relatively simple process without high cost.  So, HMRC’s use of a barrister to represent them is because most of the employment status cases don’t go further than the FTT.  HMRC is well aware of the fact that these cases are forming the basis of employment status case law on which others will be judged.  This is despite the fact that an FTT case does not set binding precedent.

“PAC also asked whether HMRC’s pursuit of some IR35 cases through the courts was fair and proportionate.  This is with reference to the Atholl House case that went up to the Court of Appeal and then back to the FTT.  The problem is that the taxpayer is the unfortunate victim of HMRC’s need to set precedent.  The Court of Appeal in Atholl House agreed with HMRC that both the FTT and the upper tribunal had erred in law when the taxpayer had won.  The irony being that when the Court of Appeal sent it back to the FTT, they decided that the taxpayer should be outside of IR35.

“Overall, in my opinion, judging employment status by using case law is proving to be ineffective and costly for both HMRC and business. You only have to look at the Atholl House case to see that.  Perhaps it’s time to look again at a statutory test.”

Reform needed

Jim Harra, permanent secretary and chief executive of HMRC, gave evidence to the committee. Dave Chaplin feels Harra’s defence of HMRC’s policies did not stand up to scrutiny. Chaplin told AccountingWEB: “Despite Mr Harra’s attempts to brush away the committee’s considerable concerns on IR35, the ministers on the Public Accounts Committee saw through his defence rhetoric. HMRC now needs to act, because taxpayers are not being treated fairly, which is a clear breach of the legally binding HMRC Charter.

“Regrettably, we do not have independent oversight of HMRC, which is why so many taxpayers are being wrongly accused of being in scope of the IR35 rules. Parliament needs to intervene.”

Contractors and those who represent them are calling for a substantial reform or abolition of the IR35 legislation in the Spring Budget. Whether the Chancellor takes this opportunity to win round self-employed voters in the next general election remains to be seen.

Replies (6)

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By Justin Bryant
05th Mar 2024 12:20

I think only one person here (who was clearly wrong and did not know what he was talking about) has ever said otherwise. See:
https://www.accountingweb.co.uk/community/blogs/davechaplin/learning-les...

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By FactChecker
05th Mar 2024 18:49

The problem is that in all the years of its existence nothing seems to have progressed much beyond posturing on both sides ... and unsubstantiated claims are thrown back and forth.

Dave Chaplin's “The PAC’s scrutiny over the implementation of the IR35 Reforms correctly identified that the new rules are deterring legitimate economic activity” is an extract from their summary, but is not based on any hard data (debatable or otherwise).
Nor of course is HMRC's willingness to grab the same underlying figures ("since the reforms 150,000-200,000 contractors have been moved onto the payroll") and attribute to them the claim of 'proof' that those workers have been brought to heel (i.e. were wrongly categorised previously).

Neither seems to understand the difference between cause & effect - or if they do are unwilling (unable?) to proffer any evidence.
The data is there in all those Govt ministries/offices who have been penalised under the legislation ... how many within IR35 and how many outwith before the rules (much to their surprise) applied to them? / how many were 'converted' from IR35 to employee (and at what change to costs)? / what change (other than due to those conversions) was there to numbers employed? / similarly what change was there to numbers (and costs) of contractors from major corporates?

There have been sufficient elapsed years that any decent data analyst could show trends and rates of change with quantifiable values (whilst noting external factors - like Covid - and correcting for those). Could it be that neither side actually cares about the truth, and just wants "to win"?

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Replying to FactChecker:
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By johnjenkins
08th Mar 2024 09:57

The reason why IR35 has never and will never work is because it is artificial. HMRC and Government, come to that, should keep their noses out of employment status. It is a commercial decision and if left alone HMRC would get loads of tax. If Government don't like it cos they think the SME's are "getting away with paying less tax than they think they ought to" then they can always tax accordingly (eg dividend tax). Funny enough we are going to have the same problem with MTD.
So whoever gets rid of IR35, AML and MTD will win the next GE hands down. Nigel, think about it.

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By AndyC555
06th Mar 2024 12:09

"Jim Harra, permanent secretary and chief executive of HMRC, gave evidence to the committee."

He explained that he was brilliant and all HMRC staff were brilliant and the service provided by HMRC was brilliant and it was jelly, cake and lashings of ginger beer for tea.

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By indomitable
08th Mar 2024 10:59

Again - talk, talk, talk by politicians

They need to ACT.

Scrap IR35 and while you're at it sack most of the leadership team at HMRC

Thanks (4)
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By mwalker
08th Mar 2024 16:07

"PAC report says IR35 rules too complex - The complexity of the IR35 rules could be deterring employers from using contractors and in some cases could be driving business overseas."

You mean it's taken them the best part of 25 years to work that out??? Talk about Specialist Subject = The Bleedin' Obvious.

We are truly governed by idiots.

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